SBA Express/Small Loan Requirements

SBA Express/Small Loan FAQs

• Cash Injection - How does it work and how much cash is a candidate required to have/use for an SBA Express/Small Loan?

  • One of SBA lenders’ main concerns during the loan process is borrower repayment ability. Lenders want to make sure that the borrower will continue to make monthly loan payments throughout the life of the business and not “walk away” from the deal. 

     

    One way that Express/Small Loan lenders ensure this is by requiring an equity (or cash) injection upfront, usually between 10-15% of the total loan amount depending on the borrower and the concept. So, for a $150,000 loan, a borrower would be expected to provide at least $17,000 upfront, and then the lender would fund the rest. 

     

    While it is common to see that the cash injection for an SBA Express/Small Loan is 10% of total startup costs, borrowers have to think of that number as a minimum.  Before an SBA Express/Small Loan lender releasing their funds, they will expect the borrower to complete a closing checklist.  The closing checklist items will vary from franchise to franchise depending on each business model and, often, total up to more than 10%. 

     

    After the closing checklist items are received, most SBA Express/Small Loan lenders require that the borrower still have $50,000 left in personal liquidity as a cushion.  Lenders refer to this cushion as post-loan close liquidity. This means that after the borrower has made all of their payments:

    • to the franchisor, 

    • to FranFund, 

    • any fees for obtaining the items on the closing checklist, 

    • and the lender, 

    they still have at least $50,000 liquid available.

• Credit Card Issues - How do changes to personal credit impact SBA loan approval/closing?

  It is very important to maintain a positive personal credit score and history during the entire SBA loan process. Borrowers should be careful not to let any hard inquiries appear on their credit report while working to be approved for an SBA loan. Borrowers also need to be mindful of managing credit card debt throughout the loan process, even if it is accrued through business expenses. The additional credit card debt could negatively impact the debt to income ratio, which can turn an approval into a denial.

• How does additional business credit, vehicle loans, etc. impact an SBA Express/Small Loan?

  It is a good idea for borrowers to establish business credit, but it is important to be mindful of timing when obtaining an SBA loan. To the extent possible, borrowers want to avoid credit inquiries before an SBA loan closing. It is wise to be aware of whether or not merchant services suppliers and other vendors require a credit inquiry so that you can postpone it until after the SBA loan has closed.
  
  There may be valid reasons for a credit inquiry to occur before the loan closing (for example, vehicle lease through a third party), and the best practice in that scenario is to delay the credit check as long as possible so that it occurs shortly before the closing of the loan. The FranFund team is always available for specific guidance on a client by client basis.

• What does a candidate need to know if a business location outside of their home is required?

  SBA loans come with a ten-year term, so SBA lenders expect that, when a business location is required, leases on business locations also allow for ten years of occupancy. The lease can come in the form of a five-year initial term with a five-year tenant renewal, an initial two-year term with four two-year tenant renewals, etc., as long as the total is a minimum of ten years.
  
  The minimum ten-year occupancy requirement applies whether the lease is for a retail, office, warehouse, or storage facility. Lenders are more flexible when the only space required is a parking space and will generally require at least a 12-month lease term.
  
  In addition to a 10-year term, lenders will also require the landlord to sign a Landlord Subordination Waiver. This document allows the bank access to the leased premises, in the event of a loan default, to seize any business assets that can be used to help pay down the loan. This document is mandatory, and any changes requested by the landlord are typically denied.

• Does the business owner have to live near their business location/territory?

  The Small Business Administration explicitly excludes remote ownership from eligibility. Lenders consider this a passive investment instead of active ownership, which is ineligible under SBA rules. SBA lenders are sensitive to where the client’s residence is in relation to their designated business territory/location.
  
  As a rule of thumb, lenders become uncomfortable if the borrower is unable to drive to their location within about three hours or are in a different state than the borrower’s home address. Your FranFund contact can help explore this topic further on a client by client basis.

• Can vehicle/trailer expenses be paid from SBA Express/Small Loan proceeds?

  Unlike SBA 7(a) loans, SBA Express/Small loans do not cover vehicles, trailers, or anything else requiring a title in the loan amount, meaning the financing of those vehicles will have to occur separately.

• What is the difference between FranFund pre-approval and bank approval?

  FranFund's pre-approval letter and FranScore, are based on an optimized franchise-specific pre-qualification algorithm, designed to give our clients a "Fast No, or a Reliable Yes." After reviewing the borrower's FranScore questionnaire results, we then pre-shop the deal with our network of lenders to ensure interest before issuing the Pre-Approval. That way, the Pre-Approval Letter is based on a bank's actual interest and not just a theoretical prediction of lender interest. We have a 99% success rate of securing a loan offer for those we've pre-approved and have full confidence when we issue a Pre-Approval letter that we will be able to secure financing for that candidate.
  
  After we have a completed loan request package, we send it to the bank for review, which begins with a hard credit pull of all guarantors and owners associated with the loan. After the candidate has passed the credit pull, a bank processor is assigned and provides a list of any remaining items needed for approval. Once completed, the loan package moves to the bank's underwriting department for official approval. At this point in the process, they do a soft credit pull to ensure there have been no negative effects to credit, and it is still in good standing. After the candidate clears the underwriting stage (being approved), the candidate is assigned a bank closer and receives the final closing checklist to fund. Once those items are complete, the loan funds are wired directly to the borrower's business bank account in one lump sum.